Many people make the choice to put the bulk of their wealth into an asset class called “house equity” (or "home equity") without considering alternatives. 

Thinking rationally, there are three ways to get money out of your house: sell it, refinance it, or get a loan against the existing equity.  In this month's newsletter we'll look at all three and address the question of down payment size when buying a new home.

While the days of no-money-down-mortgages are past, I offer some words of caution about going to the extreme of putting too much money down.  My firm offers a variety of mortgage programs that allow you to make rational home equity choices for your stage in life and wealth creation goals. 

Please bookmark my financial education site, Start with the House, where I offer wealth creation tips and observations based on current economic developments.

Once you put your money into your home, you may not see it again.  While it feels good to put enough money down to avoid PMI, if you need access to cash and can't get it, the good feeling fades quickly. 

Once you're in a home, there are only three ways to extract money from it: sell, refi, and re-leverage. 

Sell: You'll lose between 6-10%of sales price on commissions and other costs -- that's given. But in today's soft housing market you could possibly  lose on the sales price after a long time on the market.

Refi: Recent guideline changes mean the most you can expect to get back on refi is 85% of the appraised value, and with changes in appraisal codes the appraisal may come in for less than the prior appraisal. I'm getting calls from people who want to know if they're better off to taking out house equity to pay off debts .  Others want to increase their emergency fund and start/expand a business.  Starting with the house, we can find the best way to help you achieve your financial goals.

Re-leverage with equity line: Again, most programs will limit you to 90% and the appraisal methodology has probably changed since you bought your home. Here's an article on changes in home equity loans.

Need access to home equity? Give me a call to look at the options that work best for you.  And yes, that might mean a mortgage that includes PMI.

Mortgage shopping? Let's sit down and discuss your lifestyle and wealth creation goals so we can find a program that aligns with your needs.

House shopping?  Spend an hour with me to compare your life and financial goals with available mortgage products before you fall in love with a house. This way, you can limit your shopping to a price that enables you to be "home rich" instead of "house poor."

If you didn’t have chance to go through my "Start with the House" strategy it’s not too late to look for opportunities to improve your financial situation.  Let's talk.

How big should your downpayment be?  Most of the answer will be driven by the mortgage program. FHA requires 3.5% on a home valued up to $303,750.  With 50% of Charlotte market  buying homes priced in the 200s, this is a popular program. 

However, if you put down less than 20% you will pay PMI and many people don't like the idea of paying private mortgage insurance. 

But let's look at this rationally. Does putting 20% down increase your financial safety and opportunity?  If you're buying a $250,000 home, you'll need $50,000 for 20% down.  Let's compare that to putting 10% down.  $25,000 equity saves $150 per month on your mortgage payment.  But if you had $25,000 in the bank, and a crisis hit, that $25,000 would go much further than $150/month.  Here's an article on the importance of money in the bank versus the walls of your house.

Once you’ve signed a home contract it’s almost too late if you need to close in 30 days.  Get right mortgage strategy first then find the house that won’t stress you out. Your real decision is to start with the house, which enables you to turn your home into a castle instead of a prison.

No matter your stage of life or which step you're on in the home buying/financing process, a cup of coffee with a mortgage planner like me can give you clarity and peace of mind.  Give me a call today.